New York leaders are crying foul on the congressional tax reform proposal that eliminates a key deduction for many residents. In California and New Jersey, the governor and governor-elect have also voiced their opposition to the reform measure they deem harmful to their states.

But in Tennessee, Gov. Bill Haslam says the way the bill is designed could make the state more attractive to those seeking relief from their increased tax burden. State and local taxes have long been deducted from federal taxes, but the new tax reform proposal eliminates that deduction, “a good thing” for low-tax states like Tennessee, Haslam said.

As Haslam explains it, those living in states with higher tax rates currently see a greater federal tax deduction. Residents in Tennessee, a low-tax state, don't benefit as much from the state and local tax deduction.

"That changes now," Haslam said, speaking Monday at Nissan's Smyrna plant. "A lot of people who live in states with income tax of 10 or 12 percent start going, 'Huh, well, only having to pay half is not such a bad deal, but if I'm having to pay all of it, maybe I'd be better off in Tennessee.' We think it actually will encourage both investment growth and population growth in Tennessee."

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José Muñoz, Chief Performance Officer of Nissan Motor Company and Chairman of Nissan North America and Governor Bill Haslam greet each other during the launch of all-new Nissan LEAF at the Nissan Smyrna plant on Monday, Dec. 4, 2017. (Photo: Shelley Mays/The Tennessean )

William Fox, an economist at University of Tennessee Knoxville, said research shows tax rates can affect where people leave, but the impact is small. And there are several caveats to keep in mind with that calculation. Taxes pay for services, so when changing residences, an individual may also be giving up tax-funded services they enjoy.

"There is a small impact of taxes on where people live," Fox said. "With the elimination of the deductibility, you make it more expensive to live in high-tax states."

Another point to keep in mind, Fox said, is that the elimination of state and local tax deductions only affects those who itemize tax returns. Thirty percent of taxpayers itemized deductions in 2014, according to the Tax Policy Center. For those individuals, ending the state and local tax deduction would make Tennessee more attractive, he said.

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New population estimates from the U.S. Census Bureau show the Nashville metro statistical area added 36,337 people during the one-year stretch that ended July 1, 2016, meaning the region grew by an average of 100 people a day over those 12 months.
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A Moody's Analytics analysis predicted Manhattan housing prices could fall by nearly 10 percent in the coming years if the Senate bill passes, with nearby suburbs also affected, according to the New York Times. But Fox cautioned against concluding a reverse scenario would occur in Tennessee. It is unlikely any impact would be felt immediately or be significant enough to impact housing prices, he said.

"I would be surprised to see it be to a level where it had a dramatic impact on prices of housing," Fox said. "Usually those responses are pretty small and likely to take place over a number of years."

Scott Troxel, president of the Greater Nashville Realtors association's board, said the tax bill is likely to have a negative impact on the local housing market because it rewards renters over homeowners.

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Construction continues on new homes at Village Green in Old Hickory.(Photo: Larry McCormack / The Tennessean)

The House bill lowers the cap on the mortgage interest deduction. Both bills limit property tax deductions and increase the number of years before a homeowner is eligible for a capital gains deduction. The National Association of Realtors is forecasting that without residents itemizing mortgage and real estate tax deductions, Tennessee home values will drop 6 to 9 percent. That decline would cause many local homeowners to owe more on their house than it is valued, Troxel said.

"The tax reform reduces the incentives for homeownership," Troxel said. "One of the primary questions is, do we prefer to be a nation of renters or homeowners?We feel like this tax reform bill creates better incentives for renting."

The bill increases the number of years before a homeowner can benefit from a capital gains deduction on a home sale from two years to five years, which will slow the rate of home sales, Troxel said.

"We are in a market tight with inventory," Troxel said. "This will tighten it even more. People will choose to stay in a home longer to avoid capital gains."